In re Planpromatrix Online Co.

November 11, 2019 SEC CDO CASE NO. 06-19-052 IN THE MATTER OF: PLANPROMATRIX ONLINE CO. ENFORCEMENT AND INVESTOR PROTECTION DEPARTMENT (EIPD) , movant . RESOLUTION For consideration of the Commission En Banc (En Banc) is the Motion to Lift the Cease and Desist Order dated 16 July 2019 (Motion) filed 1 by Planpromatrix Online Co (PPM) through counsel. RELEVANT FACTS On 16 July 2019 the En Banc issued a Cease and Desist Order (CDO) against PPM after it was established by substantial evidence by the Enforcement and Investor Protection Department (EIPD) that PPM was engaged in the unauthorized selling and/or offering for sale of unregistered securities in the form of investment contracts to the public without the requisite secondary license from the Securities and Exchange Commission (Commission). The CDO was served by the Commission's designated sheriff on 25 July 2019 and it was posted in PPM's principal place of business. The Motion was time filed on 30 July 2019 as it was made, within the five (5)-day reglementary period provided under the Securities Regulation Code (SRC) and the 2016 Rules of Procedure of the Commission (2016 Rules). In the Motion, PPM asserts that it was denied due process when the CDO was issued because there was absence of: (1) notice and hearing and (2) proper investigation. PPM also averred that it was not engaged in the unauthorized sale of securities in the form of investment contracts without the requisite license and registration from the Commission. Thus, PPM prayed that it be furnished with a copy of the Petition filed by the EIPD to enable it to prepare and submit a position paper. In the clarificatory conference held on 7 August 2019 before the Office of the General Counsel (OGC), representatives from PPM and EIPD appeared and presented their respective positions. The EIPD argued that it received complaints about PPM which prompted the conduct of investigation and the EIPD found out that PPM was actually engaged in the sale and/or offer for sale of securities in the form of an investment contract which was carried out through the following schemes: 2x1 Matrix System, Pass3Unli, Unilevel/Indirect Referral Commission, Profit Sharing, Binary Matching Bonus, Binary Direct Downlines Commission and the Table of Exits. PPM's counsels argued that there was a denial of due process as there was absence of a proper investigation. PPM also questioned the basis for the issuance of the CDO, arguing the matter relating to the urgency of its issuance was not established. In support of the foregoing, PPM argued that more than a year has already lapsed since the EIPD posted the Advisory against PPM on 9 February 2018. PPM also manifested that it has filed a case before the Regional Trial Court of Daet, Camarines Norte, 2 against certain individuals for breach of contract, injunction with TRO and damages, alleging that they were using PPM's name in a damaging and prejudicial manner. EIPD argued that there was proper investigation stating that (1) a representative from the SEC-Legazpi Extension Office personally went to the principal place of business of PPM to inquire about PPM; and (2) PPM's president, Mr. Naval personally and voluntarily appeared before the EIPD to explain PPM's business model. In the conference held, Mr. Naval did not dispute the Advisory, he just made a few corrections regarding the activation code and the sequencing in the Table of Exits. In response, the EIPD maintained that PPM was afforded due process as an investigation was duly conducted. In support thereof, EIPD pointed out that the records of the case show that: (1) a representative from the SEC-Legazpi Extension Office personally went to the principal place of business of PPM and actually inquired and gathered information about PPM; and (2) PPM's President, Mr. Naval personally and voluntarily appeared before the EIPD to explain PPM's business model. EIPD emphasized that during the conference, Mr. Naval did not dispute the Advisory; he just made a few corrections/comments relative to the activation code and the sequencing in the Table of Exits. PPM, through counsels, also maintained that it is engaged in the business of selling e-loads and other intangible products like e-books, for which reason, the "Table of Exits" is only incidental to the business offered to its clients. PPM argued that recruitment is not the main purpose of its business and they can in fact do away with the "Table of Exits." PPM also manifested that it has already removed the business schemes mentioned in the CDO from its operations and such fact was made known publicly through a NOTICE TO THE PUBLIC 3 which it posted. On account of the foregoing, PPM argued that the CDO became questionable as it was directed at a legitimate business. EIPD however countered by arguing that the CDO was not directed to the act of selling e-loads but solely to the sale of securities in the form of investment contracts without the requisite secondary license from the Commission. EIPD emphasized that PPM's business schemes which constituted sale and/or offer for sale of securities were actually carried out by PPM, the process of which were voluntarily explained by Mr. Naval during the conference with the EIPD. In compliance with the Order, 4 PPM filed its Position Paper (With Compliance) (Position Paper) on 18 September 2019 where it reiterated its previous arguments, emphasized that it had no reason to secure a secondary license because it was not engaged in the sale and/or offer for sale of securities, and prayed that the CDO be lifted for being moot and academic and for lack of basis. In its Position Paper, PPM also raised the issue that there is a pending case which involves a prejudicial question must be resolved first prior to the resolution of the instant case by the Commission, arguing that the "resolution of the civil case will necessary (sic) affect the "investment scheme" propounded by the Honorable Commission where PLANPROMATRIX and its officers have not taken any participation thereon." 5 PPM's argument is based on the alleged civil suit which it filed against several high ranking officials of the Philippine National Police and which is now pending with the Regional Trial Court (Branch 39) of Daet, Camarines Norte. PPM also maintained that the elements of an investment contract are not present in the instant case for the following reasons: First, there is no placement of money because the P600/P1800 collected by PPM represents the purchase price of intangible goods which enables its clients to engage in the online business. The purchase price operates as the activation money is " for the purpose of availment of the electronic foods and privileges of the company. It is not for the sole or primary ability to recruit ." 6 PPM's dealers do not earn primarily from recruitment. They earn a commission of 1% or 1.5% from the total sale of e-load depending on the package or the registered account of the customer. 7 Second, there is no common enterprise because " recruitment is not the primary part of the income or not the principal activity of any account holder ." 8 The account holder neither brings in, nor is he/she compelled to bring in others to the organization. Third, there is no expectation of profit because the income received by the account holders in the form of commissions are dependent on their sales performance, i.e. , how well they sell e-loads, and the income derived from the Table of Exits is merely incidental to the sale of the products offered by PPM. PPM also made it clear in its Distributor's Handbook that the account holders do not enter into investment contracts. Finally, PPM alleges that the CDO is already moot and academic because it already suspended all its activities relating to new activation packages and abandoned the Table of Exit, which is basically incidental to PPM's primary business of buying and selling of e-loads from different telecommunication companies. 9 In its Comment , the EIPD reiterated its position that PPM was engaged in the sale and/or offer for sale of securities in the form of investment contracts without the requisite secondary license from the Commission which fully justified and warranted the issuance of the CDO. 10 The EIPD also argued that PPM's declaration that it had already suspended the activities subject of the CDO constituted an express admission that it was indeed engaged in the sale and/or offer for sale securities in the form of investment contracts. 11 In its Rejoinder , PPM argued and maintained that the intention of the one who parted with the money should be considered as the basis in determining whether a transaction is an investment or not. PPM alleged that the three (3) complainants in the Motion for the Issuance of CDO " were not enticed to participate in the table of exits or referral plans when they paid P600 ." 12 They purchased a product and facility for purposes of selling e-loads and other intangible products offered by PPM. The EIPD found that PPM continued to actively offer and sell different investment schemes to the public through the internet despite the denial of the lifting of the Advisory. Such public offering defrauds the public and misleads them to the thought that PPM was authorized carry out such activities/transactions. It is in the context of the foregoing, coupled with the Commission's mandate of protecting investors that the EIPD moved for the issuance of a CDO which was granted by the En Banc. ISSUE Whether or not the Motion of PPM is meritorious? DISCUSSION The En Banc finds the Motion unmeritorious and resolves to make permanent the CDO. PPM's main arguments in support of its Motion does not persuade this Commission. The records of the case show that the CDO was issued in accordance with the existing and applicable rules of the Commission. The same is thus valid and can be implemented as an official act of the Commission. To ensure that the Commission is sufficiently equipped to perform and carry out its mandate of ensuring compliance with laws, rules and regulations implemented by it 13 and in protecting investors, 14 the Securities Regulation Code expressly granted the Commission the authority to issue motu proprio a cease and desist order, after investigation or verification. Section 64.1 of the SRC provides: Section 64. Cease and Desist Order . 64.1. The Commission, after proper investigation or verification , motu proprio or upon verified complaint by any aggrieved party, may issue a cease and desist order without the necessity of a prior hearing if in its judgment the act or practice, unless restrained, will operate as a fraud on investors or is otherwise likely to cause grave or irreparable injury or prejudice to the investing public . (emphasis and underscoring supplied) The exercise by the Commission of the power to, and the manner of issuing motu prorio a CDO pursuant to the authority granted under the SRC was affirmed and explained by the Supreme Court in the case of Primanila Plans, Inc. vs. SEC (Primanila), 15 thus, "The law is clear on the point that a cease and desist order may be issued by the SEC motu proprio, it being unnecessary that it results from a verified complaint from an aggrieved party . A prior hearing is also not required whenever the Commission finds it appropriate to issue a cease and desist order that aims to curtail fraud or grave or irreparable injury to investors. There is good reason for this provision, as any delay in the restraint of acts that yield such results can only generate further injury to the public that the SEC is obliged to protect." It should be emphasized that contrary to the claim of PPM, the right to due process is not denied nor violated when the Commission issues a cease and desist order on the basis of the findings made its investigation . In the case of Power Homes Unlimited Corporation vs. Securities and Exchange Commission 16 (Power Homes Case), the Supreme Court ruled that: "Trite to state, a formal trial or hearing is not necessary to comply with the requirements of due process. Its essence is simply the opportunity to explain one's position. Public respondent SEC abundantly allowed petitioner to prove its side." The reason for the foregoing which is essentially grounded on the purpose sought to be achieved by a cease and desist order was also explained by the Supreme Court in Primanila, thus: "The law is clear on the point that a cease and desist order may be issued by the SEC motu proprio , it being unnecessary that it results from a verified complaint from an aggrieved party. A prior hearing is also not required whenever the Commission finds it appropriate to issue a cease and desist order that aims to curtail fraud or grave or irreparable injury to investors. There is good reason for this provision, as any delay in the restraint of acts that yield such results can only generate further injury to the public that the SEC is obliged to protect. The SEC was not mandated to allow Primanila to participate in the investigation conducted by the Commission prior to the cease and desist order's issuance . Given the circumstances, it was sufficient for the satisfaction of the demands of due process that the company was amply apprised of the results of the SEC investigation , and then given the reasonable opportunity to present its defense . Primanila was able to do this via its motion to reconsider and lift the cease and desist order. After the CED filed its comment on the motion, Primanila was further given the chance to explain its side to the SEC through the filing of its reply." 17 (Emphasis and underscoring supplied). Primanila thus made it clear that the Commission is not mandated or required to conduct prior hearing before it can issue a CDO . In the case under consideration, the records reveal that an investigation was actually conducted by the EIPD in compliance with the afore-quoted provision of the SRC, and PPM was (a) given an opportunity to present and explain its business plan and transactions during the investigation, through its President, Mr. Naval, and (b) apprised of the result of the investigation where it was afforded the opportunity to avail of the remedies provided by law. Moreover, PPM was afforded due process because it was appraised of the results of EIPD's investigation after the CDO was issued . PPM asked for and was provided with a copy of the Motion for the Issuance of the CDO which was granted by the En Banc through the OGC. On account of the foregoing, the Commission agrees with EIPD that the constitutional requirement of fair play was duly observed . PPM was not deprived of due process. The issuance of the CDO which was based on the findings of the EIPD that PPM was actually engaged in the sale and/or offer for sale of securities should also be sustained by the Commission. PPM failed to present evidence that the transactions covered by the CDO were not securities, and hence did not require secondary license from the Commission . It bears emphasis that no less than PPM itself admitted and explained its business model which included the following programs/schemes, thus: 18 "1. Online E-Loading Dealership and sale of other electronic products conducted by the independent distributor use Multi-Level Marketing (MLM) to increase the number of clients as well as Word of Mouth business. Instead of acquiring services of (sic) advertisers, the concerned distributor is paid for every package that he/she can sell. 2. Upon purchase of company's Start Account Package worth P600, the new Distributor will receive the following: a. Is now a PPM Dealer; b. Full access to PLANPROMATRIX ONLINE CO.'s Dealer's Dashboard etc.; c. Online Business Monitoring; d. 1% Discount on Dealer Wallet Purchases (Wallet used to fund your retailers); e. Free text to ALL NETWORKS with worldwide coverage; f. Data Entry Software; g. Activate unlimited number of Load Retailers (P200 each) in the e-loading business; h. 22 E-Books; and i. Text Confirmation on their account transactions. 3. A Distributor with Starter Account Package may earn by: a. Selling Retailership for P200 each; and, b. Receive commissions by sponsoring new Distributors to the company. 4. A Distributor may also Upgrade his/her account for P1,200.00 Upgraded accounts will receive the following: a. 1.5% Discount on Dealer Wallet Purchases (Wallet used to fund your retailers); and b. Bills Payment (was released last Aug. 2018 but on beta (Testing) server/app, but was stopped on last week of February 2019 because they were alarmed by the SEC advisory. 5. A distributor with an Upgraded Account will have a (sic) new ways to earn: a. Selling Dealer Wallet to other Distributors, thus their name as Upgraded Accounts; b. Accepting bills payment (Globe Plan, Smart Plan, AXA, PLDT, Maynilad, Credit Cards, etc.); and c. Receive commissions categorized in the group of Upgraded Account Owners. 6. Retailers/Distributors of Electronic products can sell/load using (3) platforms: a. Via Text Message (2256 vanity number). No Load needed to send eloading commands ( e.g. , BAL, GMXMAX15 09101234567), just maintaining at least 1 peso balance; b. Via Webtool . Retailers will have a password for login; and Via Android App . To download, open your Google Play App in your Android Phone then search for PPM Eload." The Commission agrees with the findings of the EIPD, which were supported by substantial evidence, that the foregoing schemes involved the sale and/or offer for sale of securities in the form of investment contracts which requires a secondary license. PPM'S denial that it is not engaged in the sale of securities in the form of investment contracts is belied by the admission made by its President, Mr. Naval relative to its business model which the EIPD found to be a sale of securities. Moreover, records also reveal that during the conference conducted by the EIPD, Mr. Naval confirmed the information contained in the Advisory dated 09 February 2018 . PPM's argument that the schemes enumerated in the CDO, i.e. , the Table of Exits among others, is merely incidental to its primary business of selling e-loads and other intangible products, and does not thus require secondary license, fails to convince. If at all, this is an express admission that PPM was actually engaged in the unauthorized sale of securities in the form of investment contracts without the requisite license from the Commission. The Commission clearly explained in the CDO how the business scheme of PPM partook of and was considered an investment contract after it showed that all the elements provided in Power Homes Case were all present . This justified the issuance of the CDO which was directed to the unauthorized business schemes enumerated therein and to the other business activities of PPM insofar as they facilitated the transactions which required secondary license . The Commission also agrees with EIPD that PPM's argument that it had already suspended the activities subject of the CDO constituted an express admission that it was indeed engaged in the sale and/or offer for sale securities in the form of investment contracts. Certainly, this does not make the CDO moot and academic because through the CDO, the Commission is ensuring that the transactions constituting the unauthorized sale and/or offer for sale of securities by PPM are never again carried out until the requisite secondary license is obtained by it; and by doing so, the Commission is performing its mandate of ensuring compliance with the SRC and protecting the investing public. Without a secondary license which to date, PPM has not yet presented to this Commission, PPM cannot carry out any transaction and/or activity that involves the sale and/or offer for sale of securities. The denial of the Motion is thus justified and in order. WHEREFORE , premises considered, the Motion to Lift the Cease and Desist Order (CDO) dated 16 July 2019 is hereby DENIED . The Cease and Desist Order dated 16 July 2019 is hereby made PERMANENT . Let a copy of this RESOLUTION be posted in the Commission's website and be furnished to the Company Registration and Monitoring Division for its information and appropriate action. SO ORDERED . Pasay City, Philippines, November 11, 2019. (SGD.) EMILIO B. AQUINO Chairperson On Official Business EPHYRO LUIS B. AMATONG Commissioner (SGD.) JAVEY PAUL D. FRANCISCO Commissioner (SGD.) KELVIN LESTER K. LEE Commissioner (SGD.) KARLO S. BELLO Commissioner Footnotes 1. On 30 July 2019. 2. Annex "3" of the Motion to Lift the CDO dated 16 July 2019. 3. Annex "10" of the Motion to Lift the CDO dated 16 July 2019. 4. Dated 27 August 2019. 5. Paragraph 44, Position Paper. 6. Page 21, Position Paper. 7. Ibid. 8. Page 22, Position Paper. 9. Paragraph 70, page 35 of the Position Paper. 10. Paragraph 7, Pages 6 to 7 of the Comment. 11. Paragraph 9, Page 7 of the Comment. 12. Paragraph 16, page 4 of the Rejoinder. 13. See Section 5 (d) of the SRC. 14. See Section 2 of the SRC. 15. G.R. No. 193791, August 6, 2014. 16. G.R. No. 164182, February 26, 2008. 17. Ibid. 18. Paragraph 73b, pages 36-38 of the Position Paper.